Goldman Sachs Earnings – Textbook Volatility Crush

Apologies on stale data – I’m at gate G3 about to head to Atlanta for a CBOE Index seminar this evening. Wifi is great, but delayed quotes are the best I can do!

Goldman Sachs (GS – 124.57) reported earnings this morning and the market seems to be yawning at the results as the stock is basically unchanged. Being a numbers guy I am not so much concerned with what they said or the specific results as I am with what the markets are doing post earnings. With such a muted response we are definitely seeing a dramatic drop in the implied volatility of GS options that expire this week. The CBOE publishes a volatility index based on GS option trading using the ticker VXGS – a quick check of VXGS shows a drop of 2.55 from yesterday’s close of 28.54 to 26.99, about an 8% drop. Something else I like to focus on is the near dated at the money straddle. 

For GS – the Oct 125 Straddle would be a method of trying to benefit from a big post earnings move. I checked the close last night and the GS Oct 125 Call was offered at 1.80 and the GS Oct 125 Put was offered at 2.30 for a net straddle cost of 4.10. The stock is hardly changed this morning and the result is the GS Oct 125 Call bid for at 1.00 and the GS Oct 125 Put is bid for at 1.45. A buyer of the straddle on the close yesterday afternoon could now sell that straddle for 2.45 – down 1.65 from the closing prices yesterday. This is a clear display of a volatility crush. The implied volatility for both options was around 34% late yesterday. Today the IV is around 23%. That drop in IV along with some passage of time took 1.65 out of the straddle and is a great example of what a drop in IV can do to option prices.